A Deep Dive Into Stellar Lumens

After several months of minimal news and low community activity, Stellar Lumens blindsided everyone when IBM released news that it has an ongoing partnership with Stellar and has successfully used the public Stellar blockchain to settle cross border fiat transactions in near real-time. This project involves a network of Pacific and Oceania banks (including Australian and New Zealand banks) and encompasses 12 currency corridors. The new interbank payments network is planned to process up to 60% of all cross-border payments in the South Pacific’s retail foreign exchange corridors by early next year.

This deal is not only amazing for Stellar, it’s a huge validation for blockchain technology as a whole. Examples of public blockchains being picked up for substantial use cases are rare; banks and other large companies are often only in research groups or experimenting with the technology and rarely commit to using a public blockchain for a production system… let alone a production system as large as cross-border payment settlements over 12 currency corridors.

After having stagnant or declining prices since the massive jump in May, this is amazing news for Stellar and especially for Stellar’s investors. It’s definitely caught my attention, I thought Stellar was just another half-surviving altcoin with little substance but this news has made me reevaluate. I spent the past few days doing a deep dive into Stellar, paying close attention to its technology, team, and its business relationships.

What is the Stellar network?

10,000 feet summary

Like Bitcoin, the Stellar network is a decentralized and distributed ledger.

Bitcoin is the native currency of the Bitcoin network, while lumens are the native currency of the Stellar network.

There is no mining equivalent in the Stellar network; you can run a Stellar Core validator node but validating transactions will not reward you with newly minted lumens.

While Bitcoin uses proof of work as its consensus model, Stellar uses a consensus model called the Stellar Consensus Protocol (SCP). SCP is an implementation of the federated Byzantine agreement (FBA) consensus model.

SCP does not require much computational power and has a theoretical maximum transaction throughput of 1000 transactions per second.

Median confirmation time for a Stellar network transaction is 5 seconds.

Although lumens is the Stellar network’s native asset, the network supports many different kinds of assets and anyone can issue a new asset. Assets backed by external currencies (i.e. fiat or external blockchains) are supported by the Stellar network’s anchor system.

The Stellar network has a built-in decentralized exchange where assets can be exchanged for different assets based on orders in the decentralized orderbook. Stellar transactions can contain orderbook exchanges.

Anchors serve as entry and exit points for fiat currencies into the Stellar network. They maintain both fiat currency accounts and Stellar wallets for their users. If the user deposits money into their fiat currency account, the anchor is expected to deposit an equivalent amount of the appropriate Stellar network asset to the user’s Stellar wallet. Vice versa for withdrawals. Most anchors are financial institutions like banks and remittance companies.

Stellar has a fixed, nominal lumen inflation rate of 1% per year. There also exists a fee pool where the lumen fees for network transactions are sent. Each week, the new lumens created from inflation and the lumens from the fee pool are distributed to Stellar wallets. The amount of lumens each wallet receives is based on a voting system. Every wallet gets to vote for another wallet to receive lumens; each lumen in a wallet counts as one vote. Check out a detailed description of the lumen distribution mechanism here.

As of October 29th, 2017, there exists 103 billion lumens, with approximately 96 billion lumens held by the Stellar Development Foundation. The annual inflation rate of lumens is 1%.

Stellar Consensus Protocol (SCP)

Stellar has published a whitepaper (authored by Prof. David Mazières) detailing how the Stellar Consensus Protocol (SCP) works. The whitepaper is listed on Google Scholar and cited 39 times at the time of writing this blog post. The paper is 32 pages long and extremely technical, containing elaborate mathematical proofs on the correctness of the federated Byzantine agreement (FBA) consensus model.

In FBA, each participant knows of others it considers important. It waits for the vast majority of those others to agree on any transaction before considering the transaction settled. In turn, those important participants do not agree to the transaction until the participants they consider important agree as well, and so on. Eventually, enough of the network accepts a transaction that it becomes infeasible for an attacker to roll it back. Only then do any participants consider the transaction settled. FBA’s consensus can ensure the integrity of a financial network. Its decentralized control can spur organic growth.

The SCP has two key properties that make the Stellar network a powerful asset transfer system. To start, it has an extremely low computational power requirement, especially when compared to Bitcoin’s proof of work. Second, it has a super high transaction throughput and can theoretically reach up to 1000 transactions/second.

What’s the point of lumens?

Why does the Stellar network need a native currency (lumens) if its key functionality is the transfer and exchange of custom assets?

First of all, lumens play an anti-spam role in the network. Each transaction has a fee denoted in lumens and this makes spamming the network incredibly expensive. Additionally, all accounts in the network require a minimum balance of 20 lumens.

What’s Stellar’s business model?

The Stellar Development Foundation (SDF) or Stellar.org is the company maintaining the open source Stellar network. It’s a non-stock nonprofit organization that covers its operational costs through donations and 5% of the initial lumens issued. The Stellar network is an open source, decentralized system and the SDF does not charge people or institutions for using the network.

Corporate donors of Stellar include BlackRock ($29 billion US global investment management company with 13,000 employees), Google.org, Stripe, and FastForward.

Why Stellar?

Stellar has a product that works

Stellar has a very impressive whitepaper on the SCP. As mentioned above, the paper is listed on Google Scholar and cited 39 times at the time of writing this blog post. This technical prowess is also reflected in the team’s product, the Stellar network. The network is fully functional with all the core components working and well documented.

Stellar Core is the software that acts as the backbone of the network. Stellar Core nodes do the hard work of keeping the network running by validating transactions through SCP. The nodes also allow owners to issue new assets in the network or submit transactions to the network. Anyone can download Stellar Core and start running a node. Horizon is a server application that connects to Stellar Core nodes and allows applications to interact with the Stellar network through a RESTful HTTP API interface that should be familiar to any competent web developer. Anyone can download and run a Horizon server.

The anchor side of the network (remember anchors serve as fiat gateways to the Stellar network) is also fully developed and well documented. Bridge servers are capable of sending and receiving regulatory compliant payments. Compliance is achieved through compliance servers that the bridge servers communicate with using the Stellar compliance protocol every time a payment is sent or received. The Stellar network also has its own DNS-like system where human readable addresses are mapped to account IDs. This mapping is stored in federation servers. In order for bridge servers to determine the account ID from a human readable address, it has to communicate with federation servers through the Stellar federation protocol.

Stellar provides downloadable implementations of bridge, federation, and compliance servers, though an anchor could implement custom federation and compliance servers that adhere to their respective protocols.

Who uses the Stellar network?

These are the companies that are using the Stellar network:

Deloitte created a payment network prototype using the Stellar network. The project was completed in 4 weeks and reduced transaction costs by 40%. Each transaction resolved in 5 seconds.

TEMPO facilitates remittances from Europe to the world, a $150 billion market. Using the Stellar network, Tempo can power 600,000 transactions for $0.01 in fees. Tempo launched the EURT token on the Stellar network in April 2017. EURT is valued at full parity to the EUR by TEMPO and its partners. The token can be traded for PHP (Philippine Pesos), XLM (lumens), and JPY (Japanese Yen) on Stellar. The EURT is the first step by TEMPO in integrating the Stellar network as its primary payments settlement platform.

Parkway is a licensed mobile money operator in Nigeria that uses the Stellar network to connect Nigeria’s 5 major telcos, enabling customers of different mobile money services to send money to one another.

IBM and a network of South Pacific and Oceania banks have successfully deployed a cross-border payments platform that uses the Stellar network. This new Stellar-based solution allows the banks to send money in real time whereas the old process typically took days. Although the platform is currently limited to cross-border payments involving British pounds and Fiji dollars, it’s expected to scale up to 60% of all cross-border payments in the region once all seven currencies are added. IBM’s vice president of global blockchain development, Jesse Lund, has cautioned that the use lumens as an exchange bridge between currencies is temporary but this doesn’t mean that the Stellar network will not continue to be used.

Impressive list of advisors

I didn’t realize this before, but Stellar actually has one of the most impressive lists of advisors I’ve seen for cryptocurrency projects. Well known and well respected US tech industry leaders populate Stellar’s advisory board. They include:

Patrick Collison, CEO of Stripe

Greg Stein, Director at the Apache Software Foundation

Matt Mullenwag, Founder of the popular blogging software, WordPress.com

Naval Ravikant, Founder of AngelList

Sam Altman, President of Y Combinator

Those that aren’t familiar with the US tech industry might not know who these people are, but trust me, as a software engineer for almost 6 years now, these people are big. Y Combinator is the premiere startup accelerator in the US. Stripe was a payments company startup that experienced massive growth over the last few years and now has over 700 employees. The Apache Sofware Foundation maintains one of the largest and most used set of open source software in the world. If you are software developer, you are almost guaranteed to have used Apache software at least once in your life.

Very active GitHub repositories

All good projects have active GitHub repositories and Stellar has one of the most active GitHub repositories I’ve seen. There is a healthy number of commits every day. In fact, just today (October 24th) there were 14 commits made to the stella-core repository’s master branch. Pull request and issue discussion activities are also high.

Extensive developer documentation

Stellar has one of the most extensive developer documentation for a cryptocurrency project that I’ve seen so far. Great developer documentation is conducive to developers building on the platform. This increases platform adoption which in turn leads to an increase in the platform’s value.

ICOs on Stellar

The Stellar network supports many different kinds of assets and allows anyone to issue an asset. This makes it a suitable platform for ICOs. Although there haven’t been many ICOs conducted on the Stellar network yet, this could change as Stellar comes into the cryptocurrency spotlight.

Ethereum is the largest blockchain hosting ICO tokens right now and ICOs have played a key role in driving ether’s price up over the last year. However, there is actually a strong case for companies to choose Stellar over Ethereum for ICOs. For one, the Stellar network is significantly faster and cheaper to use than Ethereum’s (e.g. 5 second vs 3.5 minute confirmation times). Faster and cheaper transactions make ICOs more accessible and more accessibility means more money raised. The Stellar network also has a built-in feature that lets developers whitelist ICO contributors. This reduces development time for ICOs that want to ensure complete legal compliance. Finally, the Stellar network’s transaction model is simpler than Ethereum’s and simplicity reduces the chances of security pitfalls. This is significant for ICOs that do not require the expressiveness provided by Turing-complete smart contracts.

Stellar vs Waves vs OmiseGo

Stellar, Waves, and OmiseGo all aim to serve very similar use cases. All three platforms have native support for a decentralized exchange. All three platforms support multiple assets. Although Waves is not currently focused on micropayments, remittances, and mobile payments, Stellar and OmiseGo are both gunning for these three use cases.

From my research, it seems that Stellar comes out just slightly ahead of Waves as a multi-asset trading platform. Although Stellar is losing in terms of ICOs, Stellar has many more anchors than Waves has gateways. Most of Stellar’s anchors are operated by external companies that include large financial institutions. Waves, on the otherhand, currently operates all of its gateways. Stellar is also currently much faster than Waves. Stellar supports a theoretical of maximum of 1000 transactions/second whereas Waves only supports 1.7 transactions/second. This will change as the WavesNG protocol comes online, but that’s not for another few months and even then, Waves’s maximum transaction throughput is still shy of Stellar’s 1000 transactions/second.

Stellar will give OmiseGo a run for its money. Almost everything that OmiseGo aims to do, Stellar is planning to do or is already doing it. Not to mention Stellar already has a robust, secure, and fast blockchain already running in the wild whereas OmiseGo is still a farcry away from even launching a public testnet. At this point we have no idea what the OmiseGo blockchain will even look like. Having a functioning public blockchain also gives Stellar a headstart in business integrations. As mentioned above, a multitude of payment companies, especially in Asia and Africa, have integrated with Stellar and are already sending payments through the platform. We also can’t forget the massive IBM and banking integration that was recently announced. This is not to say that OmiseGo is totally hopeless; there’s definitely a possibility that it can close this gap quickly but the team definitely has its work cut out for them.

If you’ve enjoyed this blog post…

You can support the author by tipping some lumens to this address GC4CDHSXYPSOOJNMBDNVWPACT6UDYDQHPJIOCW4GYTG6ZRTJH2475D3Q.

Much thanks if you do, a lot of work and time was put into researching and writing the post.

Store of Value

A cryptocurrency blog

In July 2010, one bitcoin was worth $0.08 USD. Today, one bitcoin is worth $2500 USD. Bitcoin's meteoric growth has pushed cryptocurrencies from an obscure niche to the mainstream, and created fortunes along the way. Store Of Value is a blog that will help you navigate the cryptocurrency world. As an avid crypto researcher and a crypto day-trader, I hope to keep you up-to-date with the technology and help identify market opportunities. In this way, I hope that you too, can benefit from crypto.